Apache: Low Costs Make It a Screaming Buy

As a result of its significant optimization and efficiency efforts, Apache (APA) has been able to do well in a weak oil pricing environment. In fact, it has been able to realize operating cash margin of $11 per barrels of oil equivalent at a crude oil price of $20 per barrels in the Permian Basin.

Aligning cost structure to the current environment

Apache is focusing on driving cost efficiencies. For instance, its lease operating expenses for the quarter came in at $ 7.81 per barrel of oil equivalent, down approximately 22% as compared to the fourth quarter of 2015.
This improvement in the lease operating costs was due to its greater efficiency in the North American onshore production as discussed above as well as timings of workover and other lower expenditure in the Permian and the North Sea.

Moreover, because of these ongoing efficiencies in the North American onshore production, Apache expects its lease operating costs to come in at $9.25 per barrels of oil equivalent for the year, down from its stated guidance of $9.50 per barrels of oil equivalent for 2016.

At the same time, the company during the quarter was able to lower its cumulative well costs by more than 45% on a year-over-year basis. This reduction in the well costs is due to the fact that the company has aligned its resources to the current crude oil prices and sold the assets. For instance, its recurring DD&A for the first quarter came in at $11.42 per Boe, representing a 34% decrease as compared to fourth quarter of 2015. This reduction in the DD&A was because the company wrote down many price-related assets over the years.

Apart from this, the company continues to reduce its G&A expenses, due to its consistent focus on aligning overhead with the capital spending level. For instance, its gross overhead cash costs for the last reported quarter was approximately 19% lower as compared to the first quarter of 2015. Looking ahead, Apache is finding more opportunities to reduce its overhead costs further. In fact, it is now targeting to reduce its gross cash overhead to a range of $650 million to $700 million in 2016, down notably from 2015 levels.

The continued reduction in the well costs, lease operating costs, and G&A expenses are allowing the company to achieve cash flow neutrality at a flat $35 oil price and $2.35 gas, which is a positive sign for its investors going forward. In fact, this cash flow neutrality at $35 oil price is inclusive of its dividend to its shareholders. The important thing is that with the recovery in the crude oil prices in the second quarter of 2016, the company now is expected to generate a net cash flow surplus through the remainder of the year.

Strong financial position

Apache despite a continued drop in the crude oil price environment has maintained a strong financial position. For instance, the company reduced its net debt by 36% over the last one year to a little over $7 billion from $12 billion in the first quarter of 2015. Looking ahead, Apache has only $700 million of debt maturing through 2020. On the other side, the company has a $4.5 billion of liquidity, including a $1.0 billion of cash and $3.5 billion credit facility. This strong financial position will help the company to invest in growth and create value for its shareholders going forward.

Conclusion

Apache is making significant progress on the optimization and returns as discussed above. At the same time, the company is lowering its cost structure that should allow the company to beat its earnings expectations for the second quarter of 2016. Also, the company has a strong financial position that should keep its growth intact going forward. So all-in-all, Apache remains a safe investment for a long-run.
Published on Aug 1, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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